Research On The Reverse Mortgage Insurance

Rapid development of population ageing in China has become an undisputable fact. Inparallel to continuously improvement of the social security system, the Chinese governmentwould like to accelerate the development of the eldercare sector and encourage financialsegment to develop products and services for senior citizens. As an asset conversion mode,reverse mortgage insurance increases senior’s income by releasing the cash flow which wastied up in their properties. Introducing of reverse mortgage insurance has great practicalsignificance to secure and improve senior’s living standard and to promote social stability.This study starts with description of reverse mortgage’s theoretic ground andconnotation. By studying the operational model of reverse mortgage in the developedcountries, it summarizes the general rule of reverse mortgage product. It then qualitativelyelaborates that China has already the prerequisites and feasibility to introduce reversemortgage products. After that, it performs quantitative analysis via introducing both lump sumand instalment plan pricing model and income replacing rate model. Using average lifeexpectancy and the average rising rate of house price in Guangzhou, it calculates thepossible income from eventual reverse mortgage and the “income replacement rate”(which isresult of the income divided by average annual income before retirement). The “incomereplacement rate” indicates the efficiency to increase the income of a pensioner. Thequantitative analysis shows that the average income replacement rate could be at the samelevel or even higher than current social pension system’s replacement rate of50.3%. Theearlier the reverse mortgage insurance starts, the higher replacement rate would be. It isevident that reverse mortgage insurance indeed improves the income level of seniors,especially those low income groups.Finally, the study concludes that reverse mortgage insurance could be an effectivecomplementary for those who own property but lack of cash income. The study also proposesseveral suggestions how the reverse mortgage insurance could be constructed in practice inChina.